Uncertainty and Economic Instability

Uncertainty is a central topic in Keynes’ “General Theory of Employment, Interests and Money” (1936), but also his dissertation “A Treaties on Probability” (1921) empathises the importance of uncertainty in social systems. Here he argued that social life is aleatory and yet not random. This implies that social systems (of which the economy is part) cannot in general yield certainty because they are open and organic (Chick 2003; Chick and Dow 2005). This means that structures and interrelations evolve in such a way that the past is a very limited guide to the future (Lawson 1988; Dow 2002, 2003). Therefore, Keynes doubts that rational probability calculations are particularly helpful in the social realm. Keynes’ early rather philosophical thoughts on uncertainty strongly influenced his economics and became central to his legacy. Some, among them Skidelsky (2010: 83), have claimed that: “Uncertainty pervades Keynes’ picture of economic life. It explains why people hold savings in liquid forms, why investment is volatile, and why the rate of interest doesn’t adjust savings and investment. It also explains why economic progress throughout history has been so slow and fitful. All the actors in his (Keynes’) drama are motivated to a greater or less extent by uncertainty about the future, and regard the possession of money, or liquidity, as an important way of coping with it. Uncertainty breaks the tight link between supply and demand assumed by Say’s Law.”